Shane purchased a stock this morning at a cost of $13 a share. He expects to receive an annual dividend of $.27 a share next year. What will the price of the stock have to be one year from today if Shane is to earn an 8 percent rate of return on this investment?
A)$12.38
B)$12.60
C)$12.88
D)$13.77
E)$14.28

Question

Quizplus · Accepted Answer

To achieve an 8% return on an investment of $13 per share, Shane needs to earn $1.04 (8% of $13) per share in total. Since he expects to receive a $.27 dividend, the stock price must increase by $1.04 - $.27 = $.77. Therefore, the future stock price must be $13 + $.77 = $13.77 to meet his return goal.

Shane Purchased a Stock This Morning at a Cost of $13